Mr. Kraus Economics

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Mr. KrausEconomics

• Supply

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Supply

• Producers willingness and ability to sell a
  good/service
• Supply is not an amount but a behavior

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The Law of Supply

• The price of an item determines the quantity
  supplied
• The lower the price the lower the quantity
  supplied
• When goods/services command a low price, I tend
  to produce less of them
• The higher the price the higher the quantity
  supplied
• When goods/services command a high price, I tend
  to produce more of them
• Therefore, the price of a good/service is
  directly related with the quantity supplied

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The Reason for the Law of Supply

• The law of increasing marginal cost
• It is more costly to produce two than one.
  Therefore, I must collect a higher price if I am
  going to produce more.

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Supply Schedule

• Taco Mucho Buenos Supply of Breakfast Tacos

Price Quantity
2.00 4
1.50 3
1.00 2
0.50 1
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Supply Curve
Taco Mucho Buenos Supply of Breakfast Tacos

P
Price Quantity
2.00 4
1.50 3
1.00 2
0.50 1
S
2.00
1.50
1.00
0.50
4
3
2
1
Q
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Changes in Supply

• Increase in Supply
• More quantity supplied at all prices
• Supply Curve shifts ?
• Decrease in Supply
• Less quantity supplied at all prices
• Supply Curve shifts ?
• Know that Price does not change Supply!

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Increase in Supply

P
S
S1
Q
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Decrease in Supply

S1
P
S
Q
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Changes in SupplyN.I.C.E.J.A.G.

• Natural/Manmade Phenomenon
• Input Costs
• Competition
• Expectations
• Profitability of goods in joint-supply
• Profitability of alternative goods in supply
• Government action

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Changes in SupplyN.I.C.E.J.A.G.

• Natural/Manmade Phenomenon
• Natural disasters
• Weather
• Wars
• Riots
• Strikes
• Pretty much anything not covered under your
  homeowners policy causes supply to change.

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Changes in Supply N.I.C.E.J.A.G.

• Input Costs
• Prices of raw materials or other factors of
  production
• Changes in technology
• Changes in productivity (efficiency gains/losses)

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Changes in Supply N.I.C.E.J.A.G.

• Competition
• Number of producers in the market
• Ex. Fewer producers less supply
• More Producers more supply
• Competitive Market supplies more than
  Monopolistic Market

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Changes in SupplyN.I.C.E.J.A.G.

• Expected Prices
• If producers expect prices to rise in the future,
  then they supply less now, so that they can sell
  their good/service at the future higher price
• Ex. If you expect your stocks to increase in
  value, then you are inclined to not sell them
  now, but instead you are inclined to sell them
  later at a higher price
• If producers expect prices to fall in the future
  then they supply more now while prices are still
  relatively higher
• Ex. If you expect your stocks to decrease in
  value, then you are inclined to sell them now

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Changes in SupplyN.I.C.E.J.A.G.

• Profitability of goods in joint-supply
• If the supply of beef increases, then the supply
  of leather increases
• If the supply of artichokes increases, then the
  supply of artichoke hearts increases
• Think by-products

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Changes in SupplyN.I.C.E.J.A.G.

• Profitability of alternative goods in supply
• If farmers can make more money growing pineapples
  instead of bananas, then the supply of pineapples
  will increase and the supply of bananas will
  decrease
• If auto manufacturers can make more money selling
  SUVs instead of sedans, then the supply of SUVs
  will increase while the supply of sedans will
  decrease
• Remember productive resources are scarce,
  therefore decisions about what to produce must be
  made and this entails sacrifice. Remember
  opportunity cost.

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Changes in SupplyN.I.C.E.J.A.G.

• Government action
• Business taxes
• Regulation
• Subsidies (money from govt)

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MARKET DYNAMICS
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Equilibrium

• When supply demand, there is equilibrium in the
  market
• Equilibrium creates a single price and quantity
  for a good/service

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Market Equilibrium

P
S
p
D
Q
q
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Changes in equilibrium

• When supply or demand changes, the equilibrium
  price and quantity change
• If demand increases then price increases and
  quantity increases
• If demand decreases then price decreases and
  quantity decreases
• If supply increases then price decreases and
  quantity increases
• If supply decreases then price increases and
  quantity decreases

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Increase in Demand

P
S
p1
p
D1
D
Q
q
q1
D ? . P ? Q ?
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Decrease in Demand

P
S
p
p1
D
D1
Q
q1
q
D ? . P? Q?
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Increase in Supply

P
S
S1
p
p1
D
Q
q
q1
S ? . P ? Q ?
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Decrease in Supply

S1
P
S
p1
p
D
Q
q
q1
S ? . P? Q?
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Disequilibrium

• If price occurs at some point where supply and
  demand are not , then disequilibrium exists.
• If the price is higher than the equilibrium
  price, then a surplus (QsgtQD) occurs
• If the price is lower than the equilibrium price,
  then a shortage occurs (QsltQD)

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Market Disequilibrium (Price, px, above
Equilibrium Price, pe)

P
S
px
pe
D
Q
qe
qs
qd
If price is px, then qd lt qs . surplus exists
(surplus qs qd)
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Market Disequilibrium (Price, px, below
Equilibrium Price, pe)

P
S
pe
px
D
Q
qe
qd
qs
If price is px, then qs lt qd . shortage exists
(shortage qd qs)
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Causes of Disequilibrium

• Price floor a minimum price for a good/service
  or resource determined outside of the market
• Ex. Minimum wage
• Price ceiling a maximum price for a
  good/service or resource determined outside of
  the market
• Ex. Concert tickets sold by Ticket-master

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Effective Price Floor (ex. Minimum wage in
competitive unskilled labor market)

P
S
pmw
pe
D
Q
qe
qs
qd
If price floor is effective, then qd lt qs .
surplus labor exists
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Effective Price Ceiling (ex. Single price for
admission to a popular concert )

P
S
pe
pt
D
Q
qe
qd
qs
If price ceiling is effective then qs lt qd .
ticket shortage exists
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Conclusion

• Markets work best when supply and demand
  determine the price of goods/services or
  resources.
• When forces other than supply and demand
  determine the price of goods/services or
  resources, surpluses and shortages result.
• Over time, the forces of supply and demand
  undermine artificial price controls
• Ex. Black markets, ticket scalping, undocumented
  workers

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Practice
PRACTICE QUESTIONS